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Comment by trident5000 | Hacker News Reader

The answer is you can borrow unlimited debt if you pin interest rates at 0% (though eventually you will lose control at the back end of the yield curve without heavy govt intervention). What happens to your currency in that process is debasement/hyperinflation.

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> What happens to your currency in that process is debasement/hyperinflation.

Not if the vast majority of population lives paycheck to paycheck and food and basic necessities production are not disrupted.

In that/our case, you simply get the inflation of the assets the "elites" who have disposable income choose to spend that disposable income("investing" in real-estate, bitcoin).

That’s only accurate if paychecks and food adjust at the same rate. You’re pretty screwed if your wage is set at the beginning of the year but bread is ticking up every week.

The savings rate is a whole other issue. Strictly on the value proposition of the dollar and discussing economics, the savings of common folks in any amount cannot be invested into production assets meaningfully with real yields as prices rise = they are worthless. Meanwhile homes, auto, healthcare, education, all rise and what you are holding has less purchasing power. Inflation is very real even if the price of specific items like your socks are not rising substantially. Also CPI is a basket created by the fed to sell bonds, it has no other purpose.

How are homes having less purchasing power? The rise in real estate prices in western democracies has been a global phenomenon, and everywhere it's happened the problem is exactly because the value of homes is rising disproportionate to everything else - that's not inflation! If you own a house, you are materially increasing your wealth by a lot because if you could liquidate that asset (and a bunch of people can because they have two or more) then the amount of raw stuff you can buy with the proceeds has gone up and up.

Maybe not disrupted in their everyday lives, but it certainly leads to more concentration of wealth by the elites.

It absolutely does.

There were some responses on Twitter to this post that basically said every historical case of hyperinflation was due to behavior and governmental instability rather than pure economics of the supply of currency. I'm not sure how true that is, but it does seem odd that we don't really have a model for hyperinflation if it results directly from sovereign debt and money creation.

> What happens to your currency in that process is debasement/hyperinflation.

Japan may disagree with that assessment:

* Interest rate: https://fred.stlouisfed.org/series/INTDSRJPM193N

* Inflation: https://fred.stlouisfed.org/series/FPCPITOTLZGJPN

* YEN-USD: https://fred.stlouisfed.org/series/EXJPUS

Japan is in a category of its own. They have a declining population which followed a massive asset bubble that popped 30 years ago. https://fred.stlouisfed.org/series/POPTOTJPA647NWDB

> Dean Baker goes after people who claim that Japan has suffered terribly from its debt burden, arguing that Japan has actually done pretty well. But he's wrong: Japan has done better than he says

> Dean looks at GDP per capita. But Japan's aging population means that you really want to look at GDP per working-age adult. And by that measure Japan's growth has been essentially the same as America's

[…]

> The truth is that these days Japan looks less like a cautionary tale than like a role model. Its performance only looks bad if you assume that the debt is a terrible problem, when all the evidence says that it isn't

* https://twitter.com/paulkrugman/status/1215628645869420545

25 years of <1% rates, huge 'money printing', and yet no inflation or currency debasement, and respectable per-worker GDP growth.

Where's the problem?

I have to admit Japan is an interesting case and brings up good counter points. Really wages need to go up to spark inflation on the ground floor for common items.

Krugman has a 1998 paper on Japan that's probably still relevant today, especially since more places are hitting zero rates:

* https://www.brookings.edu/bpea-articles/its-baaack-japans-sl...

* https://www.princeton.edu/~pkrugman/japans_trap.pdf

Giving these a read, thanks.

You can't just ignore all the people who aren't working though? One of Japan's specific problems (which will also hit much of the West in a decade or two) is that society is aging fast and the ratio of retirees to working people is increasingly unsustainable.

Exactly. Just reading those quotes (haven't read the linked article) leads me to think that you can't ignore the huge liabilities comprised of education, medical care and pensions.

> ratio of retirees to working people is increasingly unsustainable.

I'd like to see the economic models that were used to calculate at what (estimated) point this becomes "unsustainable". Do you have a citation?

What percentage of the population has to be "elderly" or taking their pension? What is the minimum percentage of the population that needs to be in 'working age' years before it becomes a problem?

Unless there are models people are just throwing darts in making these statements. Show me that the math exists (even though I may not understand it as a layman). Pontificating is cheap.

Krugman in 1998:

> The purpose of this paper is to show that the liquidity trap is a real issue-that in a model that dots its microeconomic i's and crosses its intertemporal t's something that is very much like the Hicksian liquidity trap can indeed arise. Moreover, the conditions under which that trap emerges correspond, in at least a rough way, to some features of the real Japanese economy. To preview the conclusions briefly: in a country with poor long-run growth prospects—for example, because of unfavorable demographic trends […]

> In the model of sections 1-3, a liquidity trap will arise only if future productive capacity is actually lower than current capacity. Before loosening that constraint, we can ask why one might expect Japan's future capacity to be relatively low compared with today's. And the obvious answer is demography: Japan's combination of declining birth rate and lack of immigration apparently means a shrinking rather than growing labor force over the next several decades.

[…]

> Moving outside the formal model, the prospects for a liquidity trap also depend on investment demand. Here demography again comes into play: the prospective decline in the labor force reduces the expected return on investments.

* https://www.princeton.edu/~pkrugman/japans_trap.pdf

Do you really think a rich country of 100M hasn't done its homework on this? I'm personally partial to Matsutani's Shrinking-Population Economics:

https://www.amazon.com/Shrinking-population-Economics-Lesson...

From a review: " The parlous state of Japan's pension system is well known, but Matsutani reviews the projections: by 2030, contributions will cover only 44% of expenditure, leaving a projected yearly deficit of ¥‎57 trillion by 2030 and a cumulative debt load of ¥‎1,240 trillion, roughly equal to the sum of all household wealth in Japan today. Getting back to balance would entail either more than doubling contributions from 15% to 34%, or cutting benefits by 56%."

> Do you really think a rich country of 100M hasn't done its homework on this?

I'm sure they have. But we're all a bunch of randos on the Internet to each other, which is why I'm asking for citations: I'd like to hear the sources which people's thoughts come from so I can better assess them.

Otherwise the person on the other end of the screen is just another crazy from /r/wallstreetbets. :)

An aging society would suffer from inflation because there is a lot of wealth but not enough workers to service all the demand.

Turkeys think they have a great life right up until Thanksgiving.

While I’ll readily concede that Japan has surprised everyone, at some point in time the sheer magnitude will overcome the lenders’ belief. Their ability to repay, and then it all goes downhill very fast.

That’s the thing - hyperinflation happens fast. You usually don’t see inflation, high inflation, higher inflation, and then hyperinflation. Instead you see slow deterioration and then a huge jump in a short period of time. It’s like falling off a cliff in its suddenness.

As Noah says in the article. The question he's addressing is how to know when we are approaching the cliff. We all agree it is out there but we can have a much better society if we know how far. If we fall off the cliff of course that is bad. Conversely if we cripple our opportunities because we are afraid, but the cliff is really many many trillions of dollars further away, that is also bad.

That seems akin to predicting the stock mocket... If you, as a lender, could predict before everyone else when the cliff was approaching, then you would stop lending sooner.

If everyone does that, then the cliff moves closer, and your algorithm loses all predictive power.

UK debt-GDP has hit 250% during the Napoleonic Wars and 240% after WW2:

* https://en.wikipedia.org/wiki/File:UK_GDP.png

* https://en.wikipedia.org/wiki/United_Kingdom_national_debt#H...

The UK is still rolling forward that debt:

* https://www.theguardian.com/business/2014/oct/31/uk-first-wo...

Japan peaked at 180%.

The US can always revert the Trump tax cuts (for the rich), as they didn't seem to do anything useful and get some extra revenue. That should help.

Japan has been well above 180% for years. [0]

[0] - https://www.statista.com/statistics/267226/japans-national-d...

> sheer magnitude will overcome the lenders’ belief

Japan lends to itself. The BoJ owns so much of the government bond market that there are days where the benchmark bond simply doesn't trade [1]. Under absolutely no circumstance will Japan have any issue repaying Yen denominated debt when they have a monopoly on the Yen. They're theoretically not far away from just retiring the whole bond market and just running an overdraft at the BoJ for all government borrowing requirements.

Can you provide evidence to your point on hyperinflation happening all of a sudden too? I think all instances in history (except maybe Zimbabwe, but I've lost the details) involve external obligations that are unable to be met (War repatriations payable in gold for Germany, extreme dependance on imports for Venezuela since the economy was so misbalanced, high USD denominated debt burdens for Argentina ... etc). I

[1]: https://www.wsj.com/articles/nobodys-trading-10-year-japanes...

Take a look at this page on Investopedia. [0]. All the examples are less than 24 months. Also, WEForum has some stats from 2019, where Venezuela has been in hyperinflation for a longer period of time. [1] and of course, Lebanon is probably the most current example. [2]

I’ve saved the best for last, though. Nicholas Kraus is probably the leading expert on hyperinflation, and has a great list here. [3]

[0] - https://www.investopedia.com/articles/personal-finance/12291...

[1] - https://www.weforum.org/agenda/2019/08/inflation-deflation-v...

[2] - https://www.reuters.com/article/us-emerging-inflation-graphi...

[3] - https://www.cato.org/sites/cato.org/files/pubs/pdf/hanke-kru...

> Japan lends to itself

I meant to address this point separately. What you say is technically true, but if they just retired the debt, Japan would simultaneously become a much poorer country.

Remember, the owner of the debt gets to mark it as an asset, so while the debt would be canceled out, the assets would drop in an equal amount [0].

[0] the Accounting equation is Assets = owners equity + liabilities, so a reduction in liabilities must cause a corresponding reduction in assets. And yes, it’s that insidious, but it is spun by people who have an interest in people not understanding this.

Small tangent: I tend to borrow all the money that is offered to me at 0% effective rate, e.g., when buying a new mobile phone. I would even go as far as to borrow all money that is offered to me at sub-inflation rates.

Is this rational?

Yes this is rational behavior unless the payback schedule gets you in trouble or the rates shift.

Yes it's totally rational. I do the same thing. I had a school loan that was at a 0.1% interest rate. I could have paid it off with my savings, but my savings interest was more than that, so it made more sense not to pay it off. I was sad when it was finally paid off, because it meant I was no longer arbitraging the interest.

When it comes to cars, what's often offered is 0% financing or some kind of cash back. It may actually be better to go with the cash back.

Preet Banerjee made a 10 minute video laying out the math on why not going with 0% financing may be better:

* https://www.youtube.com/watch?v=KGPu0jPryfU

> When it comes to cars, what's often offered is 0% financing or some kind of cash back.

Well, that just means the financing is not 0%.

That video was good, but I'm disappointed he didn't point out that it's usually better to rent a depreciating asset, ie. get a lease. Of course there are a lot of other factors, like how long you typically keep your car for. But if you're the kind of person who like a new car every 3-4 years, it's almost always better to just lease the car than to buy it. Especially if you have a schedule C business that you can write some of it off against.

> That video was good, but I'm disappointed he didn't point out that it's usually better to rent a depreciating asset

He has lots of video on personal finance. I'm sure it's covered in one of them (he has a rent versus buy-house comparison for example: IIRC he used to own, but now rents).

Yes, if it's the same cost.

Take my car insurance, for instance. I can pay it all in one chunk, up front, for $X, or I can pay two payments of $Y. But (IIRC) X < 2Y. It's not the same cost. (This is one of the ways that it's more expensive to be poor - if you don't have the money to pay for car insurance up front, it costs more.)

You just need to be careful because usually these offers have fine print along the lines "if you don't pay this back fast enough, you will have to pay very high interest even on the debt you already paid off."

Yes!! I did one of those 0% TV purchases. They purposely made it so you couldn't set up automatic payments, so you had to do it manually every month. One month I was a day late, so they changed the interest to 19%, and charged me interest for all the past payments too.

Luckily I was able to get them to reverse it and then I just paid it off, but had I not noticed, I would have owed them a ridiculous amount of money.

It is rational if you think you can meet your debt obligations e.g. through a job.

However, the problem with this approach is that your bank account no longer offers "resistance" to spending. It is easy to get into debt that you can never repay. This shouldn't be an issue if you do proper accounting but many people don't do that.

The term hyperinflation needs to fall out of the lexicon. In every casual economic discussion it's the favorite apocalypse goto word for people, and every one seems to think it's right around the corner.

It's not going to happen.

Why not? Is there something that makes the US immune?

Also, people fixate on the "hyper" part and assume the US is going to go full Zimbabwe/Venezuela where an egg costs a trillion dollars, but even sustained non-hyper inflation of 10% or 20%/year would wreak havoc on most people's retirement funds or mortgages.

The highest rate of inflation the US ever hit was in the 1980 (https://www.usinflationcalculator.com/inflation/historical-i...) at 13%.

The world did not end, and the rate was not sustained. This time period corresponds to high interest rates because it has to, but the value of loans was depreciating rapidly.

Since then the Federal reserve has had a target inflation rate of 2% over time and if you look at the data they've hit it.

So yes, the US has substantial protections against uncontrolled changes in the inflation rate - that's the Federal Reserves mission statement.

The rate was not sustained because the books have been cooked. How the US measures has been periodically tweaked to keep the 2% story going. Using the early 1980's metric of inflation we've been at roughly 10% annually since the turn of the millennium: http://www.shadowstats.com/alternate_data/inflation-charts

Wouldn't it be "good" for people's mortgages, especially if they've got a long term fixed rate?

Inflation only happens if the production cannot keep up with demand. I believe that the US's productive capacity is very high, and have a huge slack (due to heavy mechanisation and automation). If demand grows, production can keep up - and thus, no inflation.

Countries that import most of their supply (like in venezuela) cannot have slack in their production, and thus you see high inflation in times of high demand and low supply.

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